Friday, May 29, 2009

Jamaica's economy playing out as expected

When I listened to some of the reactions of surprise to the PIOJ's report on the January to March 2009 economic performance, I wonder if we are really serious. As far as I am concerned the economy is playing out as expected. Whenever I am asked about the 2.8 per cent downturn in the economy, during that period, as if it is unexpected, I refer to the article I wrote on July 18, 2009 titled "A perfect economic storm". At the time I started saying that "The next six to nine months will be one of, if not the most challenging, in the economic history of independent Jamaica".

For me it was obvious that if things continued the way they did and if leadership did not come together, we would be experiencing all we are today. In fact, it is worse than I expected, as the Lehman collapse made things much worse but the trend I expected is playing out. The extent to which we are feeling it today could have been avoided but too much time was spent in political diatribe and side arguments that distracted us from what we needed to do as a country.

Identifying the fundamental challenge
So the consequence of the country not adequately projecting and preparing for the economic downturn has landed us in a situation that I believe will be hard to avoid now. I never expected such a sharp decline in the first quarter, which is going to be better than the second quarter in my estimation. What is happening also is that the economy is already like a runaway car, which is harder to stop once it gets going, and would have been easier to slow down prior to it starting to pick up speed. It is now going to take much more effort, and financial resources, to slow down the decline.

With all of this said, though, it is still possible to lessen the effects on the country, and I had written in my book about the real cause of the problem and gave an example of a five-year plan that could place us on the path to economic development. Some will not take what I say seriously, though, as I am just an accountant trying to talk about economic matters, but I will continue to be comforted by my own voice.

In order to determine how we can deal with the challenges we face, and which are worsening, we must first understand what the underlying problem is. This again I outlined in my book, which in summary is the fact that the country spends more foreign exchange than it earns. Unless this equation is changed we will always be caught in the downward spiral of economic stagnation/decline and debt. If we accept that this is the fundamental problem then it makes no sense addressing symptoms, which we have always been doing. Because of where we are today the measures to address the problem get more and more difficult the longer we wait.

What do the first-quarter results tell us about the state of the economy? If we properly assess this then we can make an assessment of what needs to be done. And if this is properly addressed then we won't even have to talk about high interest and exchange rates, as they will be automatically improved. We won't have to talk of crime, as economic prosperity will come to our citizens. In effect, if you address the cause of the illness then usually the patient gets better.

Inflation as projected by the BOJ is expected to be between 11 to 14 per cent this year, driven mainly by the new taxes introduced in the budget. This was expected and we must now pray for no inclement weather during the hurricane season that will cause any agricultural damage, as this would push inflation further.

As expected agriculture is the only real growth area, and the sector I have been pushing aggressively since 2007 as Jamaica's gold mine, instead of looking for it in the hills. The goods- producing sector has declined as expected, and in particular construction and mining. These will continue to decline in the second and third quarter, and agriculture will continue to be the main growth area.

The services sector has declined by 1.6 percent, and I expect that it will decline further given the decline in the goods-producing sector as fewer services will be demanded.

Proposed quick fixes
The fact that the process of decline has started we will then have to manoeuvre through the economy's adjustment and it will be painful as many more will lose jobs, or become unemployable in the changing economic environment. This changing economic environment means that different skill sets will be required, which many of us have not prepared for.
There are some short-term solutions that I think can be taken to lessen the effect and make for a quicker economic recovery, as follows:

. The most important, I think is, to create a much more facilitative environment to encourage small business development. This is the sector that has been saving developed economies like the US, as the large companies are unable to react quickly to changing circumstances and most will see decline. The bureaucracy, however, is stifling small business growth. Even so I have seen evidence of many people trying to get into new businesses, especially amongst the younger generation.

. An aggressive move must be made to build out agro-processing plants and greater investments in agriculture. Agro-processing will allow us to reduce the risk from weather as well as add greater value to our exports using the same resources. I know of at least one person who has wanted to make an investment in agriculture but has faced some hurdles.

. Public transportation - this is a quick fix, as if we were to immediately start a park-and-ride system from highly populated cities and towns such as Portmore and Spanish Town we could reduce traffic congestion and oil use. My idea for park-and-ride systems and direct shuttles to major work areas is also in response to the lack of security on public transportation. This could reduce significantly the oil bill in a time when as I said at the start of the year oil could end the year at US$70 per barrel.

. Infrastructure spending should take place around tourism areas and agro-processing. This would have the double effect of increasing employment and preparing our main sectors where we have a comparative advantage for global economic recovery.

. Income tax and GCT incentive should be provided to companies that add foreign exchange to the country through exports or reverse exports.

. Vocational training - this is the quickest way to improve the skill set of the many who sit idly by at street corners waiting for an opportunity. The last time I said this I was accused of promoting illiteracy, even though this is an improvement for many.

What is needed to address the economic challenges is a fundamental shift in the paradigm, which no doubt is difficult for the government to do because of the fundamental flaws that exist in the infrastructure.
Also the need to balance the social with the economics is always a challenge.

In the short term there are some quick fixes which must be implemented if we are to lessen the effects of the inevitable economic decline.

Friday, May 08, 2009

Poor and boasy…Jamaica’s plight

The budget debates are over, and I think I have done enough commentary on the presentations, and would like to look at what I have always, and still consider to be one of Jamaica’s main challenges. And nowhere is this more demonstrated than in the rise of one of Jamaica’s street boy’s to prominence in the Magnum’s King and Queen contest on television.

Poor and Boasy is the name adopted by the winner of the said contest, and his story is one that should encourage all Jamaicans and make us determined about what needs to be done to truly unearth the hidden potential of Jamaica. He walked away with the $1 million prize but by doing so gave us a message worth much more, that of the significant talent that lies unexplored in our neglected people.

Poor and Boasy reflects Jamaica’s plight in two ways – (1) His name signifies Jamaica’s borrowing over the years to be “boasy”, as we have used it for consumption items such as cars; and (2) The fact that we have neglected the poor citizen of this country who has the talent to bring fame and fortune to Jamaica.

Jamaicans’ aggressiveness
And when I say neglected people I do not only mean the other street boys who have to hustle by wiping car glasses, but I mean most Jamaicans who have to suffer the indignity of the inefficient public sector bureaucracy; the less than adequate roads and transportation system; the unprofessional behaviour of the police, who they are forced to pay with their taxes; and the debt they are called on to pay that most have not benefitted from. So is it any surprise that Jamaicans are known the world over as an aggressive set of people, as our leaders over the years have helped to create this aggression, which it is only through this self taught behaviour that many have learned to survive.

Some Jamaicans have turned this aggression into a positive by channeling it to significant achievements. The problem however is that many also channels this into criminal activity, which holds the great majority and the country at ransom.

It is this scant regard for the citizen of Jamaica that I believe has led us to where we are today. Because achievements are not spoken about in terms of development of the rights and democracy of the Jamaican citizen but rather in terms of macroeconomic targets and fiscal deficits. And I am in no way saying that these targets are not important but just as in the US the rights and development of each citizen must be at the central part of any planning or development we look towards. I believe this is the only true way to achieve real economic and social development. If we put the Jamaican citizen at the heart of all our plans then we will achieve all the macroeconomic targets that have long eluded us as it is people that drive a country forward not debt.

So when I hear parliamentarians spending so much time discussing the level of the minimum wage, I wonder if they do not realize that the need to have such a lengthy discussion on it means that we have failed Jamaicans. The setting of the minimum wage should be procedural without any comment if we develop a country where Jamaicans have the requisite skills and opportunities to earn a lot more than the minimum wage. The fact that we have to spend so much time deliberating on the minimum wage means that our gift to many Jamaicans since independence is to keep them at the minimum wage level, and to make it seem as if we care by adjusting it upward each year, only making life more and more difficult.

It is the failure to address the theme of the citizen at the centre of our development, which I think has been the biggest failing over the years of the debates and the country. In the 1970s the world moved into the Information Age and helped to usher in the need to grow based on a knowledge based society, which Kim Marie Spence put on the table recently in a review of the budget on Direct. I do not think that there is anyone who will dispute the fact that we live in an era where a competitive edge is not based on the amount of capital one has (that was the industrial revolution) but is very much dependent on the human capital of a country or company.

Knowledge/Efficiency Age
It is ideas that create a competitive advantage not machines. Everyone has access to technology and machines, as even if they can’t buy it they can easily outsource it. The Internet allows an individual working from his/her home to have access to the global marketplace and appear to the world to be a large corporation. In fact the mammoth office building and its attendant costs are now a competitive disadvantage. This I believe will be more pronounced in what is emerging to be a new economic order that will come from the current economic downturn. We are looking at the birth of a new era that will maybe be called the Knowledge or Efficiency Age.

For decades we have always been talking about the need for economic and social development in Jamaica and have different periods where we have focused on both separately. In the 1960s we had economic development; in the 1970s we had social development; in the 1980s we had economic development; and in the 1990s to 2000s, we suffered from the effects of globalization. What we need is to have a period where the focus is on developing both the economic and social aspects of Jamaica. I believe that the only way we can do that is to place at the centre of our development the citizen of Jamaica.

I commented in my last column on the need to change the format of the budget debates, as the current one does not serve as the developmental tool that a budget should be. One of the things I would want to see achieved is the setting and debating of developmental objectives before the revenue and expenditure estimates are worked out and tabled. In setting these objectives the central theme must be the protection of the rights and improvement of the Jamaican citizen. This was espoused somewhat in the 1970s but the shortcoming was that the belief was that it could be done without proper economic development. The fact is that neither can be done successfully without the other.

The budget did address the call on the people to bear the sacrifices needed for us to move forward, and we now need to specify a timeline to see the benefits of the sacrifices. While appealing to the Jamaican people for their patience and understanding, and recognizing the challenges we face, we must also say that we abhor (i) every time a citizen’s rights are abused by the police or criminal, (ii) the fact that every Jamaican owes over $400,000 as a part of the national debt without seeing any benefit, (iii) the condition of and the indiscipline on the roads and the night noise that Jamaicans have to put up with, and (iv) the lack of opportunities and education that stagnates our economy.

We should also commit to every Jamaican that if we make the sacrifices now and follow the road map for economic and social development (which should be communicated to the people) then these are the targets that we will achieve. We must assure the citizen that their rights and development are at the forefront of every policy decision.

If we continue spending too much time debating the minimum wage and the continuation of handouts to the poor, we reduce the hope to make Jamaicans really “boasy”.

Friday, May 01, 2009

Tax as a developmental tool

The budget debate is currently underway, and as I write this the prime minister and Opposition leader have not yet made their contribution, and the minister of finance is to deliver his closing address.

This budget is no doubt by far one of the most difficult ones we have faced as far as I can remember. This time Jamaica has found it difficult to borrow its way out of our self-inflicted challenges, and all of this in the face of the worst global economic crisis since the end of World War II. Many of us, including myself, were not born then and this would therefore be the worst we have seen.

But what does that mean for Jamaicans? Even though the world has gone through good times, Jamaicans have always been asked to tighten their belts. Each year, the budget comes around we are always bracing for the high probability of more taxes. I can't remember a budget where there was a net give-back to the Jamaican taxpayer. The trend of Jamaican taxes, over the years, is always to ask Jamaicans to fork out more and more. And this is even as (i) we were borrowing more money every year and (ii) social services have been deteriorating fast. This has resulted in negative development for the country as a whole.

A cultural problem
The truth is that taxes in Jamaica for a very long time have been used as a means to plug a financing gap, and continue to fund an inefficient public sector bureaucracy. So even when many celebrated the implementation of the first MOU, I lamented its introduction as I saw it as another cover-up of the inefficiencies in the bureaucracy and a means to allow Government to continue on its merry way of spending more than it could afford to. This was only delaying the inevitable, and what they have done is place more burden on the people who they say they're trying to save.

What should have been done with regard to the MOU is that it should have been used as an opportunity to restructure the public sector, and allow for the transition of some of the workers out of the public sector into the private sector where they would have had much better earning power and the bureaucracy would have been more geared towards private sector productivity. But that was not to be, as consideration of finances by the government has not been about development but rather just a juggling of the books.

So because of our failure to implement financing policies as a support for broader development objectives, we have as a country found ourselves in the unenviable situation of having to contract the economy. This is simply because we have failed, when times were good, to generate any fiscal surpluses. So an analogy is that one would be earning exceptional income and fail to save in good times, choosing instead to spend it all on consumption. The result is that when times get bad there are no savings to fall back on, forcing one to cut back drastically on their lifestyle. In Jamaica, our culture does not encourage saving, like the Jews and Chinese, for example. Once we get a little money then everyone should know, as we have to drive the most expensive car and buy the most drinks at the bar.

I remember only last year going into a bank and meeting someone I have known for a while. Being courteous, I asked him how things were going, to which he answered 'very rough', as his payments from OLINT had ceased and he couldn't afford to properly maintain his Land Rover. I then suggested to him that he should sell his Land Rover, as it was fairly new, buy a cheaper car and invest the remainder of the money in his business. Of course, in true Jamaican style, he answered that if he sold his Land Rover it would affect his image. There endeth the conversation and I could see the fruitlessness in suggesting anything else. I hope he and his Land Rover are okay.

This is similar to the way that we have approached the national finances.

A move to consumption taxes
This is why I supported in principle the move to consumption taxes, as it influences consumption behaviour. What we need to do is use tax policy as an instrument for influencing productive and consumption behaviour. For example, we suffer primarily from spending more foreign exchange than we earn. What I would do then is use consumption taxes as a tool to encourage production and consumption of local goods and discourage consumption of imported goods. So if oil is the largest import value, then a tax on retail fuel consumption is the right move but should be complemented with (i) an efficient, disciplined, and safe public transportation system; and (ii) fares subsidised to encourage public transportation.

Similarly, tax incentives should be given to those investing in agriculture - primary and agro-processing production. The investment should have certain conditionalities such as large-scale production, where economies of scale can accrue.

The suggestion by Dr Davies for a surcharge on interest payments is consistent with the argument that the interest component of the budget needed to be looked at and some way found of alleviating the earlier cash flows, as this would create the fiscal space needed to ensure the economy does not contract significantly. The suggestion made by Dr Davies is however, more radical than anyone else would have thought as this would amount to a unilateral permanent impairment on the net earnings to debt holders. This is opposed to a temporary impairment in cash flows only, which would provide the debt holders with full restitution and also an economy that would have greater future earnings potential, assuming that the extra cash flow is used for development purposes.

I do not want anyone to think, however, that merely structuring tax policy around development objectives is the panacea we have been looking for. There is a lot more that needs to be done (as I explained in my book) such as dealing with crime and certain social and political issues.

One of the things I would change, if I had control of the process, is the format of the budget debates. The way the budget debates are structured has been with us for decades, even though the world has changed many times over during that time. I would adopt a structure that would help me to support my developmental objectives, while at the same time considering all options before finalising the budget. The way our budget is structured, it is cast before any serious consideration is given in the debates.

So I would first start with a discussion on the developmental targets. I would have the Government and Opposition spokespersons debate the developmental objectives, for all Jamaica to see. Next the government would look to determine what tasks are necessary to achieve the objectives, and place the most efficient structure and costs to each task. This would determine the expenditure requirements. I would then look at the revenue options, bearing in mind the negative effect on economic activity of taxes, and so any taxes being extracted should have a value added in excess of what it detracts from the economy. I would then allocate the revenue resources to the expenditure in order of priorities. This may mean an extended budget debate but at least we would get it right. These are just my very simple thoughts on making the budget debates relevant to development.

A failure to realise that taxes should be used as a tool for development, instead of just to raise more money, will mean that Jamaicans will be continually called on to fund a bureaucracy we will be less able to afford each year. The incremental result will be greater reductions in the real income of Jamaicans each year.